Insurance Regulatory and Development Authority of India (IRDAI) has introduced guidelines allowing insurers to use equity derivatives for hedging their equity portfolios. This move is intended to mitigate market volatility risks and protect the value of insurers’ equity investments. Previously, insurers were permitted to engage in fixed-income derivatives like Interest Rate Swaps and Credit Default Swaps. Given the increasing investments in equities, IRDAI now allows hedging through stock and index futures and options, strictly for risk management purposes. Over-the-counter (OTC) exposure to equity derivatives is prohibited. Insurers must establish a Board-approved hedging policy, internal risk management procedures, IT infrastructure, and periodic audits. Additionally, a corporate governance framework must ensure compliance and protect policyholders’ interests. Insurers must submit quarterly reports to IRDAI.
Insurance Regulatory and Development Authority of India
Press Release
28.02.2025
Insurance Regulatory and Development Authority of India (IRDAI) remains committed to fostering growth of the insurance sector while safeguarding policyholders’ interests. In this direction, IRDAI hereby issues comprehensive guidelines permitting insurers to utilize equity derivatives to hedge their equity portfolios. This move aims to facilitate insurers to hedge their existing equity exposures against volatility in equity market and ensure preservation of market value of equity investments and thereby reducing risks in equity portfolio.
Under the current regulatory framework, IRDAI allows insurers to deal in Rupee Interest Rate Derivatives in the form of Forward Rate Agreements (FRAs), Interest Rate Swaps and Exchange Traded Interest Rate Futures (IRFs). Besides Fixed Income Derivatives, insurers are also permitted to deal in Credit Default Swaps (CDS) as Protection Buyers.
As there is an increasing trend in investments in equity market by insurers and owing to associated volatility in the equity prices, a need is felt to permit Hedging through Equity Derivatives. These guidelines aim to provide insurers with enhanced opportunities for risk management and portfolio diversification.
In line with these guidelines, insurers will be able to buy hedges in stock & index futures and options against their holding in equities subject to the exposure and position limits. The equity derivatives shall be used only for hedging purpose. Any Over The Counter (OTC) exposure to equity derivatives is prohibited.
Before taking exposure to equity derivatives, insurers are advised to put in place Board approved Hedging Policy; Internal Risk Management Policies and Processes; Information Technology Infrastructure; and Regular and Periodic Audits. A robust corporate governance mechanism shall be in place wherein the Board and Senior management reviews the contracts undertaken are not prejudicial to the interest of the policyholders.
Insurers are required to furnish prescribed reports to the Authority on quarterly basis.
